Holy cow, I wrote a book!
In Windows 7, the folder tree in the Explorer navigation pane
by default no longer highlights the item in the view pane.
This change was based on user testing and feedback,
but if, like me, you prefer things the old way,
you can play with two new check boxes on the Folder Options dialog.
You can get to Folder Options in a variety of ways:
However you wind up there, the item you want to turn on is
Automatically expand to current folder
(or Expand to current folder if you use the super élite method).